Amid concerns over rising oil prices and pressure on the Indian currency, Arvind Panagariya has urged the Reserve Bank of India to allow the rupee to depreciate instead of aggressively defending it with foreign exchange reserves.
In a post on X, the 16th Finance Commission Chairman said the RBI should not allow the “psychology” of the Rs 100-per-dollar mark to dictate policy decisions.
“Do not let the psychology of Rs 100 per dollar determine your policy response. 100 is just a number, like 99 and 101. Whether the oil shortage is short-lived or long-lived, the right response at this moment is to let the rupee depreciate,” Panagariya wrote.
Panagariya’s remarks came as the rupee touched the key 100-per-dollar mark in the one-year forward market on Wednesday, signalling that currency markets are pricing in a weakening bias for the USD/INR pair over the next 12 months.
According to him, if the current oil shortage lasts only for a few months to a year, the rupee may weaken initially but could later recover significantly once India’s oil import bill declines and foreign investors return to take advantage of a cheaper currency.
However, if the oil shock turns out to be long-lasting, Panagariya warned that trying to artificially defend the rupee would only drain India’s forex reserves over time.
